Question

Need help with this Finance question. Parts a through h. Thanks for the help

Markov Manufacturing recently spent $14.9 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its marginal corporate tax rate is 21%. The company plans to use straight-line depreciation. a. What is the annual depreciation expense associated with this equipment? b. What is the annual depreciation tax shield? c. Rather than straight-line depreciation, suppose Markov will use the MACRS depreciation method for the five-year life of the property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule. d. If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which schedule should it choose? Why? e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years? f. Under the TCJA of 2017, Markov has the option to take 100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in that year, Markov would take the full depreciation expense equivalent to the cost of buying the equipment. Rather than straight-line depreciation, suppose Markov will use the bonus depreciation method. Calculate the depreciation tax shield each year for this equipment with bonus depreciation. g. If Markov has a choice between straight-line, MACRS and bonus depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which schedule should it choose? Why? h. How might your answer to part (g) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years? Note: Assume that the equipment is put into use in year 1. a. What is the annual depreciation expense associated with this equipment? The annual depreciation expense is $ million. (Round to three decimal places.)

Answer 1

Given,

Cost of equipment = $ 14.9 million or $ 14900000

Marginal tax rate = 21%

Life of equipment = 5 years

Solution :-

Cost of equipment - $14.9 million. Life of equipment. 5 years Now, Annual depreciation expense Cost of equipment life of equipment $14.9 million – $2.98 million. 5 years - Annual depreciation tax Shield Annual depreciation & marginal expenses tax rate $2.98 million X 21% = $0. 6258 million or $625800

(c) Depreciation tax Shield according to MACRS depreciation method. A B C Cost of MACRS equipment 5 year dates D E=BXC XD marginal | Depreciation Tax tax rate Shield years 114900000 20%. $625800 14900000 32%. 21% 1$ 1001280 14900000 19.20%. 21% & 600 768 3 [14900000 | 12.52% 21%. $360460.80 4 114900000 11.52% 21-. $360460.80 S 114900000 5.76% 1$ 180230.40

see tax (d) You can shield depreciation same in both is depreciation methods. But in case of MACRS depreciation method, it receives the depreciation tax Shield sooner as compared compared to straight-line depreciation method. Thus, MACRS depreciation generates a higher NPV of lits Cash flows.